The Housing and Urban Development Agency (HUD) recently issued a new “disparate impact” rule – essentially codifying the main method used to prove housing and lending discrimination for the past several decades – but the timing of this move may say more than the rule itself. The new rule has come into effect while the Supreme Court is deciding whether or not to hear a critical housing discrimination case, Mount Holly v. Mt. Holly Gardens Citizens in Action. If the Court grants cert, it has the potential to overturn the very substance of HUD’s new rule and, more importantly, the “disparate impact” method of fighting housing and lending discrimination in general. Among the many stakeholders, this has considerable impact on the banking and insurance industries, which have faced an increase in lending and rate-setting discrimination lawsuits based on “disparate impact” claims. You can read the HUD rule here, and you can read the Mount Holly petition for a writ of certiorari here.
In the case, the Mount Holly Township in New Jersey determined that a residential area known as “the Gardens” was blighted, and it moved forward with redevelopment plans for the area. Although the Township acquired and demolished most of the houses in the area over several years, it failed to build new housing. Residents of “the Gardens” eventually sued and won on the claim that the Township’s actions have had a disparate impact on African Americans. On appeal before the Supreme Court, the Township now raises the question whether “disparate impact” is a cognizable claim for proving discrimination under the Fair Housing Act.
As the agency responsible for enforcing the Fair Housing Act, HUD works to sniff out illegally discriminatory housing practices based on protected characteristics (e.g., race, ethnicity, disability, etc.). It has long interpreted the Act so that even where discriminatory motivation is missing or hard to prove, HUD can still prosecute lenders or landlords, for example, if their practices cause protected persons to suffer unjustified and disproportionate harm. This is known as the “disparate impact” principle that is now codified into the rule. Based on a three-part burden-shifting test, the rule often makes it easier for plaintiffs to establish a practice as discriminatory since they do not have to prove the more subjective motivation behind that practice.
HUD’s reason for promulgating the rule is simple enough on its face: the agency wants to ensure a formalized, consistent application of the “disparate impact” principle nationwide. At the same time, HUD and the Obama administration are also likely taking proactive measures in light of Mount Holly, given that the principle may have a better chance of surviving the Court’s review if backed by a codified federal regulation.
More broadly, this decision could have significant implications for home insurers and banking institutions like Wells Fargo and Bank of America, which have been the latest targets of discriminatory lending lawsuits. The Obama administration has relied heavily on the “disparate impact” principle to go after discriminatory mortgage lending practices, pointing to data showing higher interest rates and less favorable loan conditions provided to minority persons. In the process, the administration has won some of the largest settlements in history worth hundreds of millions of dollars for minority communities across the country. Banks maintain that these settlements are the undue cost of avoiding litigation rather than any real finding of discrimination, and that the inevitable result is a transferred cost to the consumer. The American Banking Association, in particular, has expressed concern that HUD’s rule creates “unnecessary compliance risk,” which then limits credit availability and drives up the cost of borrowing in a recovering economy.
Therefore, civil rights advocates and the American Bankers Association (ABA) are well aware of the high stakes if HUD’s rule is upheld or overturned. If the Supreme Court takes the case, the waiting period begins; otherwise, HUD and civil rights advocates may have a greater sense of closure for the present.
For further reference, please see this Wall Street Journal article and this ProPublica article.